Amazon, initially established in the 1990s as an online bookseller, has evolved into a formidable internet entity offering a vast array of products and services. Over the past three decades, the company has expanded its footprint into various tech sectors.
In the past 20 years, the “Magnificent Seven” stock has delivered an impressive 10,310% return, turning a $1,000 investment into $104,000. However, recent market volatility has affected Amazon’s share price, which stands 26% below its February peak as of April 11, prompting a reevaluation of the company’s business performance.
Financial success has been a hallmark of Amazon’s journey, driven by Jeff Bezos, the company’s billionaire founder, who emphasized prioritizing customer satisfaction. This focus has led to remarkable growth, with Amazon’s revenue surging by 617% over the past decade. In the previous year alone, the company reported net sales of $638 billion. Wall Street analysts project a compound annual growth rate of 9.7% for Amazon’s revenue over the next three years, suggesting a favorable outlook for the company.
Amazon’s growth potential is buoyed by its presence in sectors like cloud computing, online shopping, streaming entertainment, and digital advertising, all of which are expected to expand in the coming decades. Investors may find Amazon’s efforts to control costs and improve efficiencies appealing. The company’s operating income rose by 462% over the past two years, indicating its profitability potential. As revenue grows and the management team maintains operational discipline, earnings are expected to increase.
Amazon’s dominant market position is attributed to its competitive strengths and economic moat. Its large scale enables substantial investments in the supply chain, which in turn yields cost advantages due to the high volume of merchandise handled. Additionally, the marketplace benefits from a network effect, attracting more shoppers and merchants to its platform, thereby creating a positive feedback loop.
Amazon Web Services (AWS), the leading cloud computing platform, also enjoys cost benefits and profitability by leveraging fixed costs. AWS customers face switching costs, and the platform boasts a technical edge, especially with the data it collects that can foster the development of artificial intelligence tools.
However, Amazon’s market dominance attracts regulatory scrutiny, and the company faces stiff competition in all its business segments, necessitating continuous innovation. Maintaining good labor relations is crucial given its substantial workforce, and macroeconomic challenges, such as evolving tariff situations, cannot be overlooked.
For investors, the current dip in Amazon’s stock price presents a buying opportunity. The stock trades at a price-to-sales ratio of 3, lower than its five- and ten-year averages. Although long-term predictions are challenging due to the unpredictable nature of the world, Amazon remains a high-quality business with a reasonable valuation, making it a contender for investment consideration.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, serves on The Motley Fool’s board of directors. Neil Patel and his clients have no positions in the mentioned stocks. The Motley Fool holds positions in and recommends Amazon. A full disclosure policy is available.